Bank Runs and Institutions: The Perils of Intervention

Posted: 10 Apr 2011

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2009

Abstract

We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create. We show that the efficient response to a run is typically not to freeze all remaining deposits, since doing so imposes heavy costs on some individuals. Instead, once a run is underway, (benevolent) government institutions would allow additional deposit withdrawals, placing further strain on the banking system. When depositors anticipate these extra withdrawals, their incentive to participate in the run increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur.

Keywords: Banking panics, time inconsistency, deposit freeze

JEL Classification: G21, G8

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Bank Runs and Institutions: The Perils of Intervention (September 1, 2009). American Economic Review, Vol. 99, No. 4, 2009. Available at SSRN: https://ssrn.com/abstract=1804221

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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